Do you have enough financial protection?

16 March 2022

The end of a current tax year, and the beginning of a new one, is often a good time to review financial circumstances and objectives. Given the unpredictability of life, and the fact that circumstances can change very quickly, it makes sense to hold periodic reviews of your wealth and assets. This is even truer for those people with larger sums of wealth, and for the increasing number of individuals whose wealth is intertwined with an international lifestyle.

A common misconception when doing such a review, is that protection planning – or insurance – is something that can be deferred. Many people can put off thinking about ‘worst-case scenarios’ in their lives, focusing instead on more enjoyable short-term goals and pursuits.

Unfortunately, it is a fact of life that at some stage, we all exit the stage. What’s more, many of us may also suffer serious illness during our lifetime. Both of these things make the case well for financial planning and protection, especially when you have loved ones to support or businesses and employees to protect.

In this article, we’re going to look at three categories of financial protection – for your family, for your debt, and for your estate.

Protecting your family

Family is often a key motivator for people getting their financial affairs in good order. Even when you have sizeable wealth, the absence of a financial back-up plan in times of crisis can quickly escalate an already uncomfortable scenario for loved ones, further adding to their stress.

With the UK currently experiencing cancer diagnosis at a rate of one new case every two minutes1, there are compelling reasons to consider income protection should you fall ill. And equally, if the worst were to happen, are you comfortable that your family could sustain their current lifestyle in the absence of your income?

Typical financial planning topics include school fee funding, university costs, and giving children a helping hand onto the property ladder. As Garry Villis, a Director at Barclays Private Bank explains, these are things to think about early in your financial planning: “Protection planning can create a pool of liquid cash that is readily available for chosen beneficiaries at the time they need it the most. They can access the funds (if structured correctly) without the need to wait for probate, which can give a much-needed lifeline whether that be used to replace lost income, make a cash injection into ventures, pay off loans or even avoid the sale of trophy assets such as family homes.”

While international wealth planning can be complex, it may come as a surprise to know that protection planning can, in fact, be very flexible. “It can be used to solve a variety of issues that may evolve over time,” says Garry. “As an example, an entrepreneur may initially use protection planning to cover income and earnings. However, as things evolve and asset bases grow, it can then be used to cover debts that have built up or to solve inheritance tax planning issues.”

For a business owner, there’s also the process of succession planning to consider. We talked about it in our recent private equity partner article, and the core principles apply to business owners more broadly.

Protecting your debt

Very few of us go through life without taking on some level of debt, often through property acquisition. For many people, credit may also have been used to buy so-called passion assets such as yachts or art, or for portfolio leveraging.

In the absence of a protection plan, you run the risk of passing all of that debt on to your loved ones, once you pass away. Depending on the scale of the debt, these events could trigger even greater emotional and financial distress during already difficult times. While that might be uncomfortable to read, it is a harsh reality of life and protection planning can help.

As Nick Bearne, a Director at Barclays Private Bank tells us, protection of debt comes in many guises: “High Net Worth and Ultra High Net Worth individuals typically have quite bespoke needs and structure their debt over different time frames, often with differing views of how and when to repay that debt. It’s therefore prudent to discuss and review personal circumstances, to ensure the correct type and term of cover is in place.”

Protecting your estate

As the saying goes, ‘there are only two things certain in life: death and taxes’. When they’re combined, and in the absence of a sufficient level of financial planning, things can get really messy for those people receiving inheritance from your estate.

It’s often wrongly assumed that marriage automatically guarantees spousal asset transfer in the absence of a will. However, when there are children involved, the (UK) laws are, in fact, different. (We’re going to cover wills in the follow-up article to this piece so watch this space).

The first step is to ensure a will is in place. Although gifting forms a part of many clients’ estate planning, this invariably still leaves a very sizeable amount of wealth that is subject to 40% Inheritance Tax (in the UK at the time of writing, 9 March 2022). “Using insurance that is payable at the time the tax becomes due, can be a simple and cost-effective solution to consider for protecting all, or a large portion of this tax liability”, says Nick.

In summary

Protection planning is a flexible way to provide for loved ones when the worst happens, potentially offering them peace-of-mind and financial security. Given the unpredictable nature of life, you never know when you might need it and it makes sense not to delay thinking about it. Having a financial safety net is important, but perhaps the best question to ask yourself is: What happens to my family if there isn’t a protection plan in place?

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